Connecticut Attorney General Richard Blumenthal announced on Friday he was suing broker Marsh & McLennan and a US-based unit of Bermuda insurance giant ACE Limited.

The lawsuit against the two already-under-fire companies - with both being the subject of New York attorney general Eliot Spitzer's high-profile probe - alleges that ACE Financial Solution paid Marsh a secret $50,000 commission to steer an $80 million state contract to the company.

Mr. Blumenthal's office said it was also continuing investigations into whether ACE may have paid additional illegal commissions to Marsh in the 2001 deal, which was for a loss portfolio programme to cover workers' compensation claims for a group of state employees with serious injuries.

The lawsuit is the first of a series of legal actions Mr. Blumenthal expects to bring as part of an ongoing investigation into insurance industry abuses.

The suit comes after Mr. Spitzer announced a stinging civil lawsuit against Marsh in October. Although the broker was the only defendant in the case, several insurers were named as allegedly taking part in illegal bid rigging schemes with Marsh, including ACE.

However, Mr. Spitzer's investigation pointed to alleged abuses in ACE's casualty risk unit while the Connecticut action names another ACE company, ACE Financial Solutions.

Mr. Blumenthal's suit accuses Marsh of violating Connecticut consumer protection laws by accepting a commission other than the $100,000 paid by the state and falsely claiming that it considered only the state's best financial interests in arranging the contract.

The suit also accuses March and falsely claiming that it recommended ACE solely on ACE's qualifications - with concerns that Marsh chose not to divulge financial difficulties at ACE after mounting claims from the September 11, 2001 terrorist attacks.

Connecticut's request for qualification (RFQ) to brokers specifically asked for disclosure of the level of commissions (both in dollars and as a percent of premium) which the broker expected to receive, legal documents said. Marsh initially sought more than $1 million from the state in a percentage of the premium arrangement but were rebuffed by the state, finally agreeing on a flat $100,000 fee.

Legal documents said the states department of administrative services (DAS) wanted to “segregate the cost of the insurance from the cost of obtaining the insurance, i.e. the broker's commission”.

Despite this, Marsh allegedly inked a confidentiality agreement with ACE Financial Solutions - effectively agreeing to keep the terms of the deal, including the $50,000 payment hidden - two weeks after getting its ‘flat' $100,000 fee from Connecticut.

The state's complaint alleges that ACE also made it appear that it was not getting anything beyond the price of coverage by saying the $80 million premium was “net of brokerage commissions”.

“To this day, neither Marsh nor ACE, has ever revealed to the state the existence of the $50,000 ‘back-end' payment,” the state revealed on Friday.

The complaint also charges that ACE had “material issues related to its financial health that might affect its ability to perform the state's contract”.

Mr. Blumenthal, in a Press statement, said Marsh had concealed the company's “dire financial condition resulting from claims stemming from the September 11 terrorist attacks”.

Broking company Hagerdorn, which was also placing business for the state, blew the whistle on the seriousness of ACE's financial situation in a communication from late 2001 pointing out that all three major rating agencies Standard & Poors, Moodys, and Fitch had all put the company's ratings on ‘under review with negative implications'.

On Friday, Mr. Blumenthal said: “As offensive as this specific scheme is the outrageously common pattern and practice of illegal commissions and kickbacks that it reflects.”

He continued: “This lawsuit - the first of a series anticipated against insurance abuses -shows particular arrogance and avarice in victimising the state and its taxpayers. Whatever name they are called - bonuses, commissions, overrides - the effect of these concealed kickbacks is to steer contracts, corrupt competitive bidding, inflate costs and deceive customers.

“The resources raided by Marsh and ACE were a public trust to be used for compensating workers. Our investigation is active and ongoing, and additional legal action will be forthcoming shortly involving other companies and consumer victims.”

The action seeks actual and punitive damages, information allowing determination of how much Marsh was falsely paid and reimbursement for legal and investigative expenses.

ACE spokesman Robert Grieves told The Royal Gazette on Friday: “We have been cooperating and continue to cooperate with the state of Connecticut as well as other state jurisdiction.”

When asked if there would be any disciplinary action against any employees involved, Mr. Grieves said he was confining his remarks to saying that ACE was co-operating.

ACE employee Patricia Abrams pleaded guilty to a misdemeanour charge in the Spitzer matter. She and the ACE casualty risk president were later fired by ACE. There has also been speculation that the sudden resignation of ACE USA head Susan Rivera in recent weeks was also in fallout from the New York investigation. Mr. Grieves also declined to speak to the Connecticut investigation alleging abuses in a different unit than has been named in New York.

In a letter to employees on January 5, ACE CEO Evan Greenberg said an internal investigation, being led by former US attorney Mary Jo White, had involved hundreds of interviews being conducted and thousands of documents being reviewed.

He said the process should be wrapped up by the end of February. Mr. Greenberg made no mention of any sign of problems from ACE Financial Solutions, telling ACE staff the investigation, thus far, showed that abuses appeared to be contained to ACE USA's casualty risk division.

“We announced in November that several specific instances of wrongdoing did occur in the excess casualty group of ACE USA's casualty risk division. While our investigation is not yet complete, we have no evidence that such wrongdoing occurred elsewhere in our organisation.”

News of the Connecticut legal action may not have been wholly unexpected with it known for months now that Mr. Blumenthal's investigation of the broker-insurer relationship was being conducted parallel to Mr. Spitzer's.